Valerus still in expansion mode for shale growth

The shale boom has been very good for Valerus Compression Services LP.

The Houston company hired more than 250 people in the past year, including 100 in the Houston area. And despite that rapid growth, the manufacturer and servicer of natural gas compression systems is still in expansion mode.

The company has worked the Marcellus shale play in Pennsylvania for two years, but soon it will revamp its facilities in Smithfield, Pa. and hire an additional 200 people in that area. With each expansion of services in the field, whether in the Marcellus, the Bakken shale in North Dakota, the Eagle Ford shale in South Texas or the Granite Wash play in the Texas Panhandle and western Oklahoma, Valerus will need more bodies in Houston.

“We’ve grown our employee base by close to 20 percent over the last 12 months, and we will almost certainly be hiring more people in our field operations,” said Pete Lane, Valerus CEO. “And with that, we will continue to hire more people in sales and engineering, and many of those jobs will be in Houston.”

Valerus’ annual revenue has increased dramatically, from $14 million in its first year of operation in 2004 to $524 million last year.

The company is set to expand its office space at 919 Milam St. between Walker and McKinney. The company occupies about 88,000 square feet on four floors of the 24-story building, and it will soon lease an additional floor, adding 22,000 square feet.

In 2002, Charles “Chet” Erwin formed Valerus after resigning as COO from then-troubled Hanover Compressor Co., a Houston-based firm that ran into legal trouble through its dealings with Enron Corp. and a joint venture in Nigeria. Hanover merged with Houston-based Universal Compression Inc. in 2007, and the combined entity rechristened itself Exterran Energy Corp. (NYSE: EXH) — now a publicly traded company with nearly $2.5 billion in revenue.

in prime position

Lane took over as Valerus CEO from Irwin in 2009, shortly after Fort Worth-based TPG Capital LP recapitalized the company with a $500 million infusion. Erwin has stayed on as vice chairman of Valerus’ board of directors. Lane is excited by the firm’s prospects, estimating the U.S. compressor market alone at nearly $10 billion. Much of that, he said, is driven by the increased focus on “liquid-rich” plays such as the Bakken, Marcellus and Eagle Ford shales that include both oil and natural gas liquids.

The price of gas has been weak relative to that of oil — it was at about $4.29 per million British Thermal Units on the New York Mercantile Exchange as of April 5 — and companies are shifting their drilling focus to reflect the new dynamic.

Matt Beeby, an analyst with Newport Beach, Calif.-based Global Hunter Securities LLC, said the market for compression services will actually be curtailed in the short term as most companies are in the early stages of their drilling “cycles” in shale plays. Compression services are typically needed later in the life of a well as it begins to become depleted and more pressure is needed to retrieve the gas or natural gas liquids.

But as fields like the Marcellus, Bakken and Eagle Ford shale mature, Beeby said more compression services will be needed. And of course, when the price of natural gas picks up, companies like Valerus will be in prime position.

“You drill a well, it comes into production and the pressure declines and that’s when you need compression,” Beeby said. “So we’re kind of to that point. With natural gas at $4 it’s been less attractive with more focus on oil, so there’s less of a need for wells. The marginal wells in the industry don’t make sense, they’re shut in. But at some point, at maybe $5 or $6, these wells make sense to pay maybe $2,500 a month for a compressor. You’ll have kind of a heightened demand all of the sudden. We haven’t really seen that yet.”

For companies like Valerus, that means more demand for services like cryogenic gas handling, which involves extremely cold temperatures, or amine gas treatment, which uses water-based solutions to “sweeten” the gas to improve its marketability by removing hydrogen sulfide or carbon dioxide.

“As we see the gas-to-liquids price spread grow, we think there will be a lot of growth in the liquid natural gas business,” Lane said. “If you look at the plays where (natural gas liquids) are big, we already cover those, so it’s just a matter of expanding. We entered the treating and processing business (in 2010), and we expect a lot of growth in that both here and abroad.”

The company opened offices in Dubai and Jakarta, Indonesia, in 2010 to take advantage of increasing activity in Asia and the Middle East. Lane said companies in those areas and in Africa that previously flared off their associated gas are beginning to convert it into liquefied petroleum gas, used in those markets for home heating and in some instances as motor fuel.